Czech central bank surprises with hefty 75 bps rate cut

PRAGUE (Reuters) - The Czech National Bank cut its main interest rate by a bigger-than-expected 75 basis points on Thursday, bringing borrowing costs ever closer to zero as it seeks to soften the economic blow of the coronavirus outbreak.

FILE PHOTO: People enter the building of the Czech National Bank in Prague, Czech Republic, August 3, 2017. REUTERS/David W Cerny

The central bank also announced new measures to provide liquidity to non-bank entities and will let banks use mortgage bonds as collateral in its liquidity-providing operations.

But it said that it did not yet see a need to intervene immediately in financial markets by providing liquidity to financial institutions, after parliament granted it new bond-buying powers in fast-tracked legislation last month.

There had been speculation over whether it might begin asset purchases after receiving those new powers.

The bank’s latest cut brings the two-week repo rate CZCBIR=ECI to 0.25%, down a total of 200 basis points since mid-March, when the pandemic accelerated and led to the virtual lockdown of the country and the economy.

“We are reacting to what our forecast is showing us, that the fall of economy will be unprecedented,” Governor Jiri Rusnok told a virtual news conference after the decision.

In its new outlook, the central bank forecast an 8% economic contraction in 2020 and a rebound of 4% next year.

Analysts had largely expected a 50 basis point cut going into Thursday, in tune with the market which has also been pricing in steep cuts in the coming months.

The bank said five of the seven board members had voted for the deeper reduction while two supported a 50 basis-point cut.

Some central bank board members have said rates could go to ‘technical zero’, a level of 0.05% that the bank maintained from 2012-2017 as part of an ultraloose policy.

Rusnok said the bank would still have some tools at its disposal even if it reached zero rates.

But some analysts expect the bank to pause for now. Ceska Sporitelna analysts said they didn’t expect a rate cut at the next meeting in June.

“But if the economic developments worsened further or the expected rebound would be noticeably slower, the CNB could further loosen monetary conditions,” the analysts said, adding a 5 basis point cut could even be possible, or further measures.

Among the measures the bank announced on Thursday was a liquidity instrument for non-bank institutions, through short-term loans collateralised by standard tools like state bonds.

The bank will also widen collateral for existing operations and introduce three-month operations later in May.

The crown weakened by up to 0.3% on the day to touch 27.220 per euro after the meeting. Bond yields drifted lower.